Nepotism: Good for Business?

WHY YOU SHOULD CARE

Because members of the Mafia aren’t the only ones who put family first.

April 25, 2016

Little is more verboten in the United States, with its meritocratic principles and bootstrap ideals, than nepotism. But here’s a tricky thing: Sometimes nepotism just works. And not just for the favored relation. As countless family-run businesses demonstrate, nepotism can be good for the bottom line.

The term “nepotism” — from Italian for “nephew” — stems from 17th-century Vatican practice: Popes and bishops padded their entourages with loyal nephews (not having any sons — legitimate ones, at any rate). But its origins likely go back much further. As anthropologist Helen Fisher once observed, “Nepotism is one of our original family values.” These days, it’s not easy to endorse. Nepotism conflicts with modern notions of merit and equality of opportunity — and can be especially harmful to women, minorities and other groups traditionally excluded from old boys networks. It can harm an organization, too, by shrinking its talent base — which is why some businesses have outlawed it by company policy. “There’s an equity issue, and an issue about business effectiveness,” says Gloria Moss, a professor of management and marketing at Bucks New University.

Is doing a little more for kin less than kind?

Family businesses are, almost by definition, a different case, and not just for mom-and-pops. About 90 percent of American businesses are family-owned or -controlled, including 60 percent of all publicly traded firms. Some of the most successful corporations in the world — including Gap, Levi Strauss, Anheuser-Busch, Marriott, Ford Motor Company and Walmart — are family-run businesses.

And perhaps for good reason. A series of research studies over the past decade indicate that family-run firms outperform their nonfamily competitors, suggesting that the benefits of family influence and control may outweigh any harm that nepotism creates within the organization. Over the longer term, research suggests that family-run companies in the S&P 500, for example, tend to outperform nonfamily ones by about 7 percent in return on assets (one measure of how effective a company is at turning its investment into profit), including by about as much as 18 percent during the post-economic crisis years of 2009 and 2010. In short, in a corporate environment focused on short-term shareholder gains, family-run companies appear to enjoy several competitive advantages, including longer time horizons, overlapping owner and management functions, reduced administrative costs, closer customer relationships, and better knowledge transfer between generations of leaders.

Now, this doesn’t mean that these companies practice rampant nepotism among the rank and file, nor that they should. In fact, there is a good argument to be made that just the appearance of nepotism can undermine an organization, sending a terrible message to those within and outside of it. “Regardless of whether there is favoritism concerning a relative,” says Ronald Riggio, a professor of organizational psychology at Claremont McKenna College, “it may be perceived as such, and this may lead non-relative employees to become dissatisfied and disengaged.”

It can be a self-defeating perception across society, too: For example, one recent survey in the U.K. revealed that 65 percent of those asked believed that “who you know matters more than what you know.”

Do you agree? Is doing a little more for kin less than kind? Or does it depend?